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this week has been no different to any other trading week in regards of volatility. The Japanese yen has taken a hit against GBP and also AUD this week, but will we see a recovery? I think so, I believe by next week we will see the Yen back to 155 levels against the pound and possible 76-77 levels against the Australian dollar.

This weeks biggest movers can be seen below

AUD/JPY from 77.48 to 79.07
EUR/AUD from 1.7379 to 1.7075
GBP/CHF from 1.76 to 1.7870
AUD/USD from 0.8171 to 0.8282
GBP/JPY from 155.77 to 157.75

In the last few weeks we have seen a number of attempts to breach 1.65 on GBP/USD and every time the market has failed to hold above this level. A similar pattern has emerged in USD/JPY which has struggled to hold over 95. In the last four trading days we have seen a tight trading range for GBP/USD which is unusual in the light of the volatility in the last few months. Today we have a few data snaps in the calendar for the UK which could shake the markets back into life. We have UK mortgage approvals, consumer credit, net lending and M4 money supply out this morning.

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More positives as equities continued their bull run with the FTSE posting another gain yesterday. The markets were boosted by further signs that the weakness in the US economy was bottoming out. US new home sales rose 11% in June far outstripping expectation- firming and improvement in the housing sector is vital to underpinning recovery. The housing sector is a leading indicator to downturn/upturn in any economy and the news yesterday was greeted well by the markets- sustainability is still the key going forward in this sector and we are still not out of the woods but closer than ever.

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Better than expected US corporate earnings and cautiously optimistic comments from Fed chairman Ben Bernanke helped uphold the recent move into risk. Sterling has moved higher against the USD this morning with risk appetite supporting this move even in the light of last week’s sharp contraction in GDP. The pound is currently being underpinned with the improved performance in equities- however any reversal in this trend may lead to a sharp sell off in the pound. The pound this morning has also had a helping hand from an article in the Financial Times stating that in the short term China has no choice but to embrace the USD. This week we have another flurry of corporate earnings with about a third of S&P 500 companies reporting results- it is expected that the positive trend will continue.
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Sterling started strongly in early trading moving towards 1.6550 on the USD, 1.1650 against the Euro and testing 157 on the Yen. We then had the release of UK second quarter GDP which gave sterling a cold shower dropping a full cent against the USD and slipping against most other currencies. The GDP number came in at -0.8 against a forecast of -0.3- this brings the year on year fall to -5.6% and is the biggest year on year fall since records commenced in 1955.

The USD strengthened a little yesterday following comments from the Fed that they may not actually need to buy all of the bonds that it previously announced- this is effectively reining in the Feds QE measures. If we look back as to the level of weakness that the USD experienced on the announcement of the fed printing money- we saw a move from 1.29 to 1.47. Similar hints sprung from the Bank of England as MPC member Andrew Sentence said that the MPC could pause it’s bond-buying program- this added support for sterling.
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Sterling is the big loser overnight in the markets and it is really on the ropes this morning again. Recently we have witnessed a consistent pattern of steady gains followed by a sharp sell off. The pound has retraced to 1.63 against the USD and 1.15 against the euro; the 1.15 level is a crucial support on GBP/EUR and a break below 1.15 will be worrying for the pound. So what is causing this renewed weakness for the pound?

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